To increase the participation, depth and liquidity of the local stock market, in 2001 the law was approved that exempted from income tax on capital gains from the sale of shares with a stock market presence. That legislation, known as MK1, allowed those returns in the stock market to be tax-free.
Twenty years later, with a more developed market than then and within the framework of the short pension bill, the Government proposes that these earnings be taxed, but at a rate of 5%. The payment would be annual and considers all the sales that are registered from the six months after the publication of the law. The exemption is maintained for local and foreign institutional investors (such as AFPs, insurance companies and mutual funds). The Executive estimates an annual collection of US $ 56 million.
Although in Congress this exemption “was in the spotlight”, the Government had not raised it and even in the commission of economists that reviewed the exemptions this was the issue where there was less consensus. This Tuesday, a day after the announcement, the feeling is one of resignation among stockbrokers and analysts: they do not like the change, but they see it as a “lesser evil”. Basically, they consider that the design of the Treasury “reflects the preventions that the market raised,” says a source familiar with the conversations.
“We believe that the Government’s proposal, through a single rate of 5%, seeks to reasonably limit the negative effects of the capital gains tax, helping the market not lose liquidity,” says the general manager of the Chile Electronic Exchange (BEC), Juan Carlos Spencer. The executive hopes that the parliamentary discussion “does not imply even more profound negative effects for the capital market.”
Spencer says that the capital gains tax “involves double taxation,” since technically the value of the shares corresponds to the present value of future flows, which are dividends that do pay taxes. Spencer asks “to take care of our capital market due to the close link it has with the development of our country and the well-being of the people”, for which he cites the use of financial instruments that allow people and companies to save, acquire goods (such as housing) and finance their projects.
From the Santiago Stock Exchange they responded that they are waiting to know the project to analyze it.
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The Government proposes to modify the tax regime in stock markets, the construction sector, life insurance and VAT on services, in order to strengthen the solidarity pillar.
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“This measure has been the subject of arduous debate, its main criticism being that it could affect the depth and dynamism of the stock and financial market in general,” says EY’s Deputy Tax Partner, Victor Fenner.
He believes that the project has tried to balance the different aspects at stake, trying to lessen the impact of the tax: on the one hand, establishing a low rate in the form of a single tax; on the other, maintaining the exemption for institutional, Chilean or foreign investors.
Beyond the merit of substance, he says, “from a pragmatic point of view it seems to be a good balance.” This is because, he maintains, “a political gesture is made by taxing a sector whose exemption the citizens viewed with suspicion”, the collection is increased (somewhat) and “the brutal impact that taxing these operations would have had is lessened. under general rules, giving peace of mind to the market that the matter is being addressed with measure “.
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The economist at Pacífico Research says that the uncertainty is reflected in long-term rates, the dollar, more foreign currency accounts and country risk.
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However, suspicion about the change in the rules of the game is widespread. “Regarding the taxes applied to capital gains, the negative effects on the market are multiple: volumes traded, cost of financing, liquidity, among other matters”, says the Manager of Variable Income of BICE Inversiones Corredores de Bolsa, Felipe Figueroa. And remember what happened in Peru, “a country that applied taxes to the stock market and had to eliminate them in 2016 as a result of the aforementioned effects“.
The strategist senior of BCI Corredora de Bolsa, Alexis Osses, believes that because the single tax will apply only to non-institutional, there will be a more limited impact on the market, which “has been noticed in the prices of assets in the short term.” However, he adds that alternatives could arise in the discussion “that may have a more negative impact,” such as taxing the operations carried out by institutional investors. However, he estimates that for now the effects “may be less negative” than expected when the idea was presented a few years ago.
Regarding the debate on the initiative, Felipe Figueroa considers it “essential to deliver a clear signal to the market and achieve a long-term agreement that will strengthen investor confidence in the local stock market.”
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The economist says that “it is inevitable” to raise taxes, but he hopes that it will be done gradually and listening to the technicians.
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